Tuesday, 3 May 2011

What are the effects of more generous unemployment benefits? This question is addressed in a paper by Mario Centeno and Alvaro Novo delivered last week in a labour economics conference. The paper studies a 1999 reform in Portugal, when the unemployment benefit (UB) entitlement period was increased from 15 to 18 months for people aged 30-34. However, the entitlement was left unchanged at 18 months for people aged 35-39, who are used as a counterfactual.

The figure above displays job finding rates at different unemployment durations and finds very clear spikes exactly at the time when unemployment benefits run out. Consistently with previous evidence, these results indicate that unemployment duration increases very closely with the maximum UB length. Moreover, although one could expect that more generous entitlements would allow the unemployed to look for better jobs, the paper also reports that re-employment wages do not benefit, on average, from longer UB entitlement.

(On the other hand, there is evidence that those that leave unemployment at about 15 months when the maximum entitlement was 18 have higher re-employment wages than those that leave unemployment again at about 15 months but when that was also the maximum entitlement. However, it is not clear if the best comparison would be with workers that leave unemployment at say 12 months when the maximum entitlement was 15 months.)

All in all, the decision to extend unemployment benefits in 1999 (in a period of economic expansion) seems, in my opinion, to have been misguided and wasteful. Let's just hope that, now that the troika-led reforms are about to be unveiled, the findings from the paper prove symmetric in both the business cycle and the direction of change, i.e. that any cuts in UB duration (and generosity?) during a recession will also speed up job finding.